Orthopedic devices major Stryker Corporation (SYK) recently announced its plans to chop headcount in an effort to save cost as it seeks to mitigate the impact of a new tax to be levied on medical devices makers.
The Michigan-based company stated that it will cut roughly 5% of its workforce globally (impacting about 1,000 positions) and execute other restructuring activities to neutralize costs associated with the implementation of the new Medical Device Excise Tax scheduled in 2013. Stryker noted that the move is expected to shave annual pre-tax operating costs by more than $100 million starting 2013.
The highly controversial tax, representing a part of the Patient Protection & Affordable Care Act (labeled as "ObamaCare") enacted by the Government-mandated healthcare reform in the U.S., will be a drag on devices companies. When implemented, devices makers will have to pay 2.3% excise tax on sales of certain products beginning 2013.
The outlay is expected to throttle innovation as it will impact investment in R&D. Moreover, it will lead to job cuts and higher prices for customers. The federal government expects to raise $20 billion from the tax over a ten year period.
The downsizing and restructuring, which are expected to be largely complete by end-2012, will enable Stryker to realign resources and continue investment in strategic areas for growth.
Stryker said it will offer severance packages, counseling and job placement services to the employees impacted by the lay-off. The company envisions booking pre-tax restructuring charges of roughly $150 million-$175 million with $85 million-$95 million expected to be incurred in fourth-quarter 2011.
Stryker is one of the world’s largest medical devices companies and is armed with a well diversified product portfolio. The company continues to achieve healthy revenues, fueled by solid growth at its MedSurg Equipment unit.
The company’s revenues jumped roughly 15% year over year in the most recent quarter, triggered by higher sales across the board, strongly backed by acquisitions. It raised earnings forecast for fiscal 2011 to a higher range of $3.70-$3.74 (previously $3.65-$3.73).
Stryker is poised for growth riding on new products, acquisitions and recovery in capital spending by hospitals. The company is expanding its product portfolio by acquiring complementary businesses leveraging a solid balance sheet. Moreover, Stryker remains committed to delivering incremental returns to investors.
However, Stryker operates in a highly competitive orthopedic industry and faces strong competition from players like Zimmer (ZMH), Johnson & Johnson’s (JNJ) DePuy and Smith & Nephew (SNN). Moreover, it remains challenged by the sustained lumpiness in the reconstructive implant market and pricing and elective procedure volume still remain headwinds. Currently, we are Neutral on the stock, which is in line with a short-term Zacks #3 Rank (Hold).
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